Question:In regard to flood requirements, some borrowers have buildings with little to no value or that will be torn down after closing located on the property we are financing that is in a flood zone—do we have to require flood insurance for these?

Answer:Generally, yes—there’s not an exception in the regulations for buildings that have little value or will be torn down after closing. If the value is less than the minimum deductible, the bank would have to note that in the file and get a statement from the insurer to that effect. If that’s not the case, the bank may consider “carving out” buildings from the security it takes on the loan. Note that the bank should fully analyze the risks of this option. Specifically, it should consider whether it would be able to market the property securing its loan in the event of foreclosure and whether there are any zoning or other issues that would affect its collateral.